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EBECatty

Plan Continuation After Change in Control Payout

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Say a parent company with two operating  subsidiaries sponsors a nonqualified plan in which balances pay out upon the first to occur of death, disability, severance, or change in control. There are participants employed by the parent company directly in addition to the two subs. The plan's change in control definition is sale of 50% or more of parent's stock or parent's assets. On a FMV basis, Sub 1 accounts for 70% of parent company's assets; Sub 2 accounts for the other 30%. Parent company sells Sub 1 and triggers a change in control for parent company employees. Parent company will continue running Sub 2 and will continue to employ the same parent-company employees. 

Has anyone seen a scenario like this where the plan balances are paid out because of the change in control, but the plan is not otherwise terminated? So, assuming no amendments to the plan before the change in control, the existing balances would be forced out, then the parent-company employees could start deferring again? Technically it's just a permissible payment trigger that causes the distribution of prior balances, so I see no reason why the plan couldn't continue.

Thoughts?

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I agree that the plan can continue and anything deferred after the change in control would be as if it is being put into a post-CIC bucket, where the plan sponsor could even change the plan design prospectively for the post-CIC dollars.

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I am not so sure.

It is buried in the 409A permissible payment regs, but I believe your situation is covered by 1.409A-3(j)(4)(ix)(C).  Under that subsection a valid 409A CIC distribution requires under  (C)(2) the plan sponsor "terminates and liquidates all agreements" including those that would be "aggregate with any terminated and liquidated agreements'" In addition, under (c)(5) the plan sponsor may not even adopt a new plan "that would be aggregated" for a period of "three years" following the termination and liquidation of the plan whence came the distribution.  The IRS did not want to see CIC distribution abused so they have narrowed its use severely.

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6 minutes ago, Louis Richey said:

I am not so sure.

It is buried in the 409A permissible payment regs, but I believe your situation is covered by 1.409A-3(j)(4)(ix)(C).  Under that subsection a valid 409A CIC distribution requires under  (C)(2) the plan sponsor "terminates and liquidates all agreements" including those that would be "aggregate with any terminated and liquidated agreements'" In addition, under (c)(5) the plan sponsor may not even adopt a new plan "that would be aggregated" for a period of "three years" following the termination and liquidation of the plan whence came the distribution.  The IRS did not want to see CIC distribution abused so they have narrowed its use severely.

Correct, but the plan would not be terminated, and the distribution would not be based on a termination/liquidation. It would just be based on a CIC as a permissible payment event. There's nothing requiring that a plan MUST be terminated upon a CIC, just that it MAY be terminated without running afoul of the acceleration rules. 

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1 hour ago, Louis Richey said:

It is buried in the 409A permissible payment regs, but I believe your situation is covered by 1.409A-3(j)(4)(ix)(C). 

I don't agree that this is what is being discussed here.  The cited provision is the voluntary termination and liquidation of a plan.  

I have seen plans that specify a mandatory lump sum upon change in control but, absent termination of the plan under 1.409A-3(j)(4)(ix)(B), I would say any elected deferrals must continue; cancellation of deferrals upon change in control would be an impermissible acceleration.

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Good point about the deferral elections. 

I assume you could also leave the CIC payment trigger in the plan after the sale of Sub 1, such that if the parent company sells Sub 2 a few years it would trigger the CIC payment event again as a sale of (probably almost) all of parent company's assets. That would distribute the deferrals made after the sale of Sub 1. 

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My bad.  I do agree with XTitan that a CIC deferral election under 409A(a)(2)(A)(v) as amplified by 1.409A-3(i)(5) likely covers this situation and not the voluntary termination regs I cited, at least so long as there is not a second plan of same 409A type being terminated in connection with the CIC, and assuming the CIC meets the requirements of Subsection 1.409A-3(i)(5)(v) definition.  There are some majority shareholder landmines in (i)(5)(ii) (A)-(B) to note, but they did not look obviously applicable. 

 I also agree if elections to defer were made for 2018 they need to be executed in payroll and bookkeeping and a new account for post CIC deferrals makes sense (a class year plan should do this anyway).  However, likewise, if elections were not made (or there is no evergreen provision) so no elections were made for 2018, the late date when they can be made has likely now passed,  except for perhaps election to defer 409A performance based compensation if that applies. That PBC election does not need to be made (become irrevocable) until 6 months prior to the end of the performance period.  Thanks XTitan for the quick correction. 

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